UNCTAD/ITE/IIA/2005/6
UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT
Geneva
GLOBALIZATION OF R&D
AND DEVELOPING COUNTRIES
PREFACE & OVERVIEW
UNITED NATIONS
New York and Geneva, 2006
PREFACE
Reflecting a broader trend towards the offshoring of
services, a number of developing countries are attracting
foreign direct investment in research and development.
Transnational corporations, including the ones headquartered in
developing countries, are selecting developing countries as
locations for such activities. With the offshoring of research and
development, firms aim to access the skills of new locations,
adapting products to local markets and reducing their costs, in
response to competitive pressures, technological changes and a
more liberal trade and investment environment. In particular,
information and communication technologies have had a
profound effect on the way economic activities, including
research and development, are organized, enabling firms to
allocate tasks on a global scale through intra-firm information
networks. At the same time, keeping up with new developments
in information and communication technologies is a major
challenge for developing countries wishing to accelerate their
economic development. How important is this relatively recent
phenomenon? Is it set to continue?
This publication aims to elaborate key issues related to
the trends towards globalization of research and development
and their implications for developing countries: What is its
development potential? How can the establishment of research
and development abroad affect the transfer of technology – one
of the main potential benefits from foreign direct investment?
What types of research and development are the most desirable
for development? What benefits and costs are involved and,
how can policies in home and host countries influence the
allocation of such activities and their economic impact?
Globalization of R&D and Developing Countries
These questions were elaborated at the Expert Meeting
on FDI in R&D held in January 2005. This volume contains
written submissions presented by scholars and experts at the
Expert Meeting. The overview chapter is based on a note
prepared by the UNCTAD secretariat for the meeting. The
Chairperson’s summary of the discussion at the Expert Meeting
is also included, reflecting the diversified views expressed by
scholars and experts from governments. The issues addressed,
to mention a few, included the use of foreign direct investment
versus contractual channels in acquiring innovative capacities in
developing countries, the potential links of transnational
corporations’ research and development activities with the local
innovation systems of host countries, the likelihood of research
and development activities spreading to new developing
locations and, the kinds of host country policies that can
facilitate the diffusion of technologies from foreign affiliates’
activities to the local economy.
UNCTAD’s analysis of transnational corporations’
research and development activities in developing countries
benefited largely from the insights gained at the expert meeting.
The continuation and deepening of that analysis resulted in the
publication, in September 2005, of the World Investment Report
2005: Transnational Corporations and the Internationalization
of R&D (WIR05; UNCTAD 2005). The readers of this volume
may find in WIR05 a rich body of additional first-hand
information on trends in research and development, its
development impact and policy implications. Furthermore,
readers familiar with the WIR05 will also find interesting expert
opinions and additional case studies.
viii
An overview of the issues1
UNCTAD secretariat
For decades, technological change and innovation,
driven by research and development (R&D; for a definition, see
box 1), have been the most important sources of productivity
growth and increased welfare (Edquist 2000). As a result, there
is a high correlation between those countries that have shown
significant economic improvement in the past and those
countries that have made substantial investment in R&D. For
that reason, it is imperative for developing countries, including
least developed countries (LDCs), to build R&D capacities,
without which they are likely to miss opportunities to upgrade
their technologies, move up the development ladder and, catch
up with developed countries.2
Box 1. Definition of R&D
Research and development (R&D) consists of four types of activities:
basic and applied research, and product and process development.
Basic research is original experimental work without a specific
commercial aim, frequently done by universities. Applied research is
original experimental work with a specific aim. Product development
is the improvement and extension of existing products. Process
development is the creation of new or improved processes.
Source: UNCTAD.
1
This overview is based on the note by the UNCTAD secretariat
on “The impact of FDI on development: globalization of R&D by
transnational corporations and implications for developing countries”
(TD/B/COM.2/EM.16/2), prepared for the UNCTAD Expert Meeting
on FDI in R&D.
2
Many of the challenges that countries in transition face in R&D
are similar to those of developing countries. However, this overview
will not discuss in detail the specific situation of countries in
transition.
Globalization of R&D and Developing Countries
Since transnational corporations (TNCs) are playing a
major role in global R&D, it is timely to look at the
opportunities and risks that such a process creates for
developing countries. In addition to being a source of finance
for R&D, TNCs could also help developing countries to build
up their R&D commercialization systems by facilitating their
access to global supply and distribution chains and external
markets. Thus, FDI can serve as a “vehicle for carrying tacit
knowledge as well as assisting enterprises at the frontiers of
world technological learning” (Liu and Wang 2003: 945).
In certain cases, technology transfer requires the
presence of TNCs or their affiliates. Even if technologies are
imported, a certain amount of R&D capacity may be necessary
in the host economy for absorbing them, adapting them to local
conditions and applying them to alternative uses. Moreover,
entry barriers to emerging industries, in terms of capital
requirements and industrial experience, are low in the initial
stages. It is then easier for developing countries to enter and
build competitive strength as the technology evolves (e.g.
biotechnology). Once an industry reaches consolidation, entry
barriers rise (e.g. semiconductors), and developing countries get
confined to lower-value-added activities. Another reason why
developing countries are paying more attention to this area is
that their own firms are also undertaking R&D-related FDI in
both developed and developing countries in their quest to
acquire and develop R&D capacities. This further underlines
the importance of exploring the globalization of R&D and its
implications for developing countries.
The participation of developing countries in the
globalization of R&D has so far been uneven. On the one hand,
some developing countries with robust infrastructures, highly
trained workforces, reasonable intellectual property protection
and appealing domestic markets – especially in Asia and the
Pacific – have attracted significant FDI in R&D (UNCTAD
2005, Pearce 1999). These developing countries have benefited
2
Overview
from the opportunities provided by the increasing demand of
TNCs for inexpensive talent and for new developing markets.
Their policies have focused on measures to maximize the
degree of technology spillovers from FDI and, to enhance their
absorptive capacity by encouraging local firms to engage in
R&D. On the other hand, many other developing countries have
fared moderately in growth and welfare creation because their
R&D efforts have remained underfunded and delinked from the
private sector.
1. Emerging patterns and drivers of the globalization of
R&D
a. Trends in R&D by transnational corporations
FDI and technology transfer are increasingly
interlinked. TNCs are responsible for a large share of global
R&D activities. In 2002, the largest 700 firms worldwide in this
area spent $311 billion on R&D (according to data available
from the United Kingdom’s Department of Trade and Industry).
Moreover, in the current global environment characterized by
rapidly changing technologies and shorter product life cycles,
TNCs are offshoring (box 2) more and more R&D in different
parts of the world (Cantwell and Janne 1999) through both FDI
and technology alliances (non-equity mode).3 This pattern of
locating R&D differs radically from that of the past (the 1950s
and 1960s)4 and challenges the traditional view that R&D
activities by TNCs are undertaken mainly at home. While in
itself the expansion of R&D beyond the borders of home
countries of TNCs is not a new phenomenon,5 the scale of
3
Such R&D activities can be part of the manufacturing units or
independent R&D laboratories.
4
During that period, TNCs derived competitive advantages,
particularly technological knowledge, from their distinctive domestic
environments, which led to the exploitation of this advantage abroad
through exports and outward FDI (Hymer 1960; Vernon 1966).
5
It has been well documented in developed countries in a number
of studies (Brash 1966 for Australia; Safarian 1966 for Canada;
3
Globalization of R&D and Developing Countries
offshoring is rising and its geographical reach is spreading to
developing countries. The spread of R&D-related FDI to new
host countries is part of the broader phenomenon of offshoring
services, which is a still relatively new but rising trend (box 2).
Within the range of offshored services, R&D represents the
higher end of the value-added spectrum.
Box 2. Definition of offshoring and outsourcing
Offshoring is defined as the location or transfer of activities abroad. It
can be done internally by moving services from a parent company to
its foreign affiliates (sometimes referred to as “captive offshoring”,
involving FDI, in differentiation from offshoring to third parties). It is
different from the concept of outsourcing, which always involves a
third party, but not necessarily a transfer abroad. Offshoring and
outsourcing overlap only when the activities in question are
outsourced internationally to third-party services providers as shown
in the table below.
Offshoring and outsourcing R&D: definitions
Location of
R&D
Home
country
Foreign
country
(“offshoring”)
Internalized
R&D kept in-house at
home
R&D by a foreign
affiliate of the same
TNC, called “captive
offshoring”
Externalized
(“Outsourcing”)
R&D outsourced to
third party provider at
home
R&D outsourced to a
third-party
provider
abroad:
To a local company
To a foreign affiliate
of another TNC
Source: UNCTAD, adapted from UNCTAD 2004b: 148.
Stubenitsky 1970 for the Netherlands; Ronstadt 1977 for the United
States; Behrman and Fischer 1980 for United States-based and
European TNCs; Zander 1994 for Swedish TNCs; Kuemmerle 1999
for various developed countries).
4
Overview
The offshoring of R&D in developing-country locations
has involved internationally known TNCs such as Ericsson, GE,
IBM, Intel, Microsoft, Motorola, Nokia, Oracle, Texas
Instruments and SAP.6 Data on the activities of the affiliates of
TNCs from the Triad (the United States, Japan and the
European Union) confirm the rise of corporate R&D in
developing countries, although at different speeds. Between
1989 and 1999, R&D performed by all foreign affiliates of
United States TNCs in developing countries increased nine
times, to $2.4 billion, as compared to a three-fold increase
worldwide, to $18 billion in 1999.7 In developing Asia, there
was an 18-fold leap forward to $1.4 billion in 1999.8 Over the
same period (1989–1999), R&D expenditures by Japanese
foreign affiliates rose even more rapidly (eight times) than those
by United States affiliates, and offshoring of R&D by Japanese
TNCs to developing countries grew faster (10 times) than their
R&D expenditures worldwide. The offshoring of R&D by
European TNCs, especially to developing countries, is still in a
nascent stage (Cantwell and Janne, 2000). For example, the
outward FDI stock of Germany in R&D amounted to only $970
million at the end of 2002, although this was up from its 1995
level ($43 million).9 The industry and geographical composition
of such R&D is fairly conservative: 97% is spent in
manufacturing, and more than 90% takes place in the United
States and Europe.
6
For example, in 2004 Intel employed some 1,500 information
technology (IT) professionals in India, and Motorola operated one of
the largest foreign-owned R&D institutes in China, employing almost
2,000 people.
7
According to data from the United States Department of
Commerce, Bureau of Economic Analysis.
8
Despite the fact that those statistics may underestimate the role
of such locations as India, for which only $20 million, or 0.1% of
outward FDI, is reported.
9
According to unpublished data of the Deutsche Bundesbank.
5
Globalization of R&D and Developing Countries
Reflecting the increased internationalization of R&D,
foreign affiliates are assuming more important roles in many
host countries’ R&D activities. Between 1993 and 2002 the
R&D expenditure of foreign affiliates worldwide climbed from
an estimated $30 billion to $67 billion (or from 10% to 16% of
global business R&D; UNCTAD 2005: 125). Whereas the rise
was relatively modest in developed host countries, it was quite
significant in developing countries: the share of foreign
affiliates in business R&D in the developing world increased
from 2% to 18% between 1996 and 2002. The share of R&D by
foreign affiliates in different countries varies considerably. In
2003 foreign affiliates accounted for more than half of all
business R&D in Ireland, Hungary and Singapore and about
40% in Australia, Brazil, the Czech Republic, Sweden and the
United Kingdom. Conversely, it remained under 10% in Chile,
Greece, India, Japan and the Republic of Korea (idem).
Data on the geographical distribution of foreign
affiliates engaged in R&D worldwide (table 1) also point to the
growing importance of developing economies. In 2004, of the
more than 2,500 affiliates registered in the Who Owns Whom
database of Dun and Bradstreet, more than 10% were located in
developing countries, with developing Asia alone accounting
for more than 8%.10
Recent data on greenfield R&D projects initiated
worldwide also indicate a rise of developing destinations and
service-related R&D (OCO Consulting, LOCOmonitor
database). Of the more than 1,000 FDI projects in R&D
worldwide for which information has been collected for the
period August 2002–July 2004, the majority (739) were located
in developing countries or economies in transition. Developing
Asia and the Pacific alone accounted for more than half of the
10
Furthermore, there are indications that this sample survey
underestimates the role of certain Asian locations such as India or the
Republic of Korea because of, among other reasons, a classification
problem of software development.
6
Overview
world total (563 projects). These data also suggest that the
majority of the new jobs created in greenfield R&D projects
also went to developing countries, mostly to India and China
and, to information and communication technologies (ICT).
Table 1. Geographical distribution of R&D foreign
affiliates,a 2004
(Number of affiliates)
Region/economy
Total world
Developed countries
of which Western Europe
United States
Japan
Developing countries
of which Africa
Latin America and the Caribbean
Asia
South, East and South-East Asia
Number
2 584
2 185
1 387
552
29
264
4
40
216
207
Source: UNCTAD, based on the Who Owns Whom database (Dun and
Bradstreet).
a
On the basis of 2,284 majority-owned foreign affiliates identified in the
above database that are engaged in commercial, physical and educational
research (SIC code 8731), commercial economics and biological research
(SIC code 8732), non-commercial research (SIC code 8733) and testing
laboratories (SIC code 8734).
However, FDI data are imperfect indicators of the R&D
activities of TNCs abroad. Indeed, firms also often use non-FDI
forms such as technology alliances, R&D joint ventures, R&D
consortiums and university-industry linkages to access strategic
knowledge abroad (UNCTAD 2000). These forms of
cooperation can be equity- or non-equity based; in most cases
they fall outside the scope of the definition of FDI. As part of
their alliances, TNCs are outsourcing some technology
development activities to firms and research institutes
worldwide, including those located in developing countries.
While R&D by TNCs in the developing world is
concentrated in a handful of key host economies such as Brazil,
7
Globalization of R&D and Developing Countries
China, Hong Kong (China), India, Mexico, Singapore and
South Africa, other countries have also started appearing on the
radar screen of TNCs. For example, in 2003 Toyota Motor
Corporation (Japan) expanded its R&D activities to Thailand;
Monterey Design Systems (United States, software) chose
Armenia for a new R&D centre; the IT company SAA
Technology (United Kingdom) established an Enterprise
Development Centre in Nigeria; and Honda Motor Co. (Japan)
set up a new R&D unit in Viet Nam to enhance local
motorcycle development and sales.11 TNCs also target with their
agricultural R&D activities some developing countries that are
otherwise less prominent on the global R&D scene. This is the
case of Kenya, for instance (box 3).
The trend towards the internationalization of R&D
activities by TNCs, with particularly fast expansion in
developing countries, has been illustrated in a recent survey, in
which 70% of the respondents stated that they already had R&D
staff abroad and 22% reported conducting some applied
research in overseas developing markets. More than half of the
respondents were planning to increase their overseas R&D
investment (EIU 2004). The top 10 destinations included China
(in first position), India (third) and Brazil (sixth). The next 10
on the list included three developing economies: Hong Kong
(China) (thirteenth), Mexico and Singapore (sharing fourteenth
place).
Recently, a growing number of developing-country
TNCs have established R&D activities abroad. While some of
them have targeted the knowledge base of developed countries
such as the United States, an increasing number have also
located their foreign R&D activities in other developing
countries. A number of firms from the Republic of Korea,
Malaysia, Singapore and Thailand have invested in R&D
activities in India, particularly in software-related R&D (Reddy
11
www.ipaworld.com.
8
Overview
2000: 97–103). More recently (in 2003), firms from India,
Indonesia and the Republic of Korea for instance, have invested
or announced plans to invest also in locations such as Abu
Dhabi, China and Singapore.12
Box 3. R&D by TNCs in Kenya’s agriculture
In general, Kenya is not a major player in global R&D. In agriculture,
which generates a large share of its export earnings, R&D
expenditures represented only slightly more than 1% of the
developing countries’ total in 2000.a Moreover, the private sector
made up only 3% of Kenya’s total agricultural R&D expenditure in
the same year.a
However, there are several agricultural/horticultural or related firms,
including TNCs, conducting some form of R&D in Kenya. The known
cases of R&D by TNCs in Kenya have followed different strategies.
Some TNCs have decided to conduct in-house R&D. Examples
include De Ruiter’s, Regina Seeds, Fourteen Flowers (Netherlands),
Del Monte (United States) and Kordes & Söhne (Germany). Other
TNCs, such as East African Breweries (United Kingdom), Monsanto
(United States) and Syngenta (Switzerland), have opted for
collaborative arrangements with local and foreign partners. The
Kenyan Agricultural Research Institute (KARI) carries out research on
barley on behalf of East Africa Breweries and works for Syngenta to
develop insect-resistant maize for Africa. Monsanto’s involvement in
Kenyan R&D is more indirect, as its project, originally initiated in
direct collaboration with KARI and the International Service for the
Acquisition of Agri-tech Applications (ISAAA), has been transferred
to its United States non-profit partner Donald Danforth Plant Science
Center.b
Sources: UNCTAD, CGIAR, ASTI Database (www.asti.cgiar.org/
expenditures.cfm) and Beintema and Pardey (2001).
a
The share of private firms in Kenyan agricultural R&D may be higher,
because the original sample was based on information available on three firms
only.
b
The non-profit Donald Danforth Plant Science Center is a partnership
organization of the Monsanto Company and various United States-based
academic research institutions.
12
See www.ipaworld.com.
9
Globalization of R&D and Developing Countries
b. The drivers
The rise of corporate R&D abroad and the growing
importance of some developing economies as locations for
R&D-related FDI reflect the combined impact of the global
economic environment (global competition), technological
progress and improved policy environments.
In the global economic environment, a number of
important changes have taken place. First, the technology
intensity of products and services has increased significantly,
making technology a key factor of competitiveness. Second, the
complexities of global competition have increased with the
advent of new, more differentiated products and producers,
resulting in a need for faster innovation. Third, at a time when
the technology intensity of products is increasing and the life
cycles of products are shortening, R&D costs are becoming
higher. More R&D costs need to be recouped by marketing
products as widely as possible. That competitive pressure has
opened the door to global product (and R&D) mandates within
the corporate networks of TNCs.
Technological change has had a strong impact on the
design and organizational patterns of R&D, leading to a
proliferation and differentiation of corporate R&D units (box
4). Products have become “modular”13 as “component
interfaces are standardized and interdependencies amongst
components are decoupled” (Prencipe et al. 2003: 85), allowing
for the fragmentation of design and the specialization of
knowledge creation in internal or external networks of TNCs. In
addition, the emergence of new science-based technologies (e.g.
electronics, ICT, biotechnology and new materials) has had a
13
Modularity is a general property of complex systems, including
R&D, innovation and transnational production. These systems are
decomposable, at varying degrees, into loosely related subparts and
tightly interrelated components.
10
Overview
Box 4. Types of R&D units
Technology transfer units are closely linked to manufacturing units
and are established to adapt a parent’s products and processes to local
conditions in host countries.
Indigenous technology units are set up to develop new and/or
improved products for local markets. They are often established when
an affiliate identifies locally distinctive investment opportunities and
convinces the parent company of its ability to implement such new
product development.
Regional technology units are established to develop new and/or
improved products for regional markets. These units serve the national
markets in regional clusters that share some common features and
needs for specialized products.
Global technology units are set up when a single product is envisaged
for the global market. This applies, in particular, to two cases: (i)
when a TNC has allocated parts of the product range to specific
affiliates abroad and may also find it beneficial to carry out R&D
relevant to that product range in the same place; (ii) when, because of
the magnitude of resources required to develop a product range, it is
more efficient for the firm to organize a decentralized but integrated
R&D programme.
Corporate technology units are established to generate new
technologies of a long-term or exploratory nature exclusively for the
parent company in order to protect and enhance the future
competitiveness of the company.
Sources: UNCTAD, based on Ronstadt, 1977; and Reddy and
Sigurdson, 1994.
profound effect on the way economic activities, including R&D,
are organized by TNCs (Cantwell and Santangelo 1999). The
development of ICT has enabled companies to allocate tasks on
a global scale through intra-firm information networks. The
emergence of new technologies requiring less industrial
experience has also created catching-up opportunities for
11
Globalization of R&D and Developing Countries
developing countries with reserves of scientists and engineers.
R&D in microelectronics, biotechnology, pharmaceuticals,
chemicals and software development can be globalized more
easily than R&D in conventional industries, as it can be
geographically delinked from production. Moreover, in these
new technologies, R&D itself is divisible into different
modules, and these may be carried out in different locations.
This facilitates the division of R&D into “core” and “non-core”
activities. Some of these non-core activities can be carried out
in low-cost countries or contracted out to other firms (Reddy
2000).
Improved host country environments have facilitated
the globalization of R&D by TNCs. One set of policies in host
economies has dealt with the economic bases of R&D activities
in general, such as skills and capabilities development, the
strengthening of supplier networks, the improvement of
infrastructure and the development of science and research
bases. Over the decades, some developing countries have
trained a sizable number of scientists and engineers, sometimes
at advanced levels. Various developing countries have also
improved their infrastructure, education and innovative
capability, which has placed them on the list of potential host
countries for R&D location. They have similarly increased their
R&D investment as a proportion of the gross domestic product
(GDP).14 Academic institutions in developing countries have
established linkages with their counterparts in developed
countries through exchanges and joint research projects, thus
strengthening their knowledge base. In addition, the
liberalization of trade and investment regimes over the past two
decades has also contributed to the globalization of R&D by
TNCs.
14
For example, R&D expenditures as a percentage of GDP for the
Republic of Korea (2.6% in 2002) were higher than in many
developed countries.
12
Overview
2. Implications for development
Opinions differ on the degree to which TNCs’ R&D
activities help in building up local technological capacity in a
host country. On one hand, R&D-related FDI can directly
benefit economic growth by stimulating, through the R&D
activity undertaken by TNC affiliates, technological efficiency
and technological change. The globalization of R&D by TNCs
and their location in developing countries may result in what is
often believed to be a desirable form of economic activities, to
be sought actively by host countries. As TNCs gain control of a
growing part of key knowledge and technology in new
industries,
such
as
microelectronics,
biotechnology,
pharmaceuticals, chemicals and software development, the
scope for host countries to access them through contractual
forms, as selected Asian countries (Japan, the Republic of
Korea) did in the twentieth century, may be reduced. However,
it still appears possible to rely on a combination of equity and
non-equity relations with TNCs.
The potential direct benefits of R&D-related FDI for
host countries depend on the mandate and role of different R&D
units (box 4). Technology transfer units can most often provide
products and processes that are better suited to local conditions
and contribute to training local technical staff. Indigenous
technology units often provide products that are better suited to
local needs and tastes. They can make better use of locally
available materials, leading to more cost-effective products and,
they have more potential to form linkages with the local
innovation system. Regional technology units can establish
strong links with the local innovation system, widening its
capabilities and, they can help in the international specialization
of scientific and technological capabilities. Global technology
units and corporate technology units can transfer application
knowledge to convert theoretical knowledge into tangible
products and processes.
13
Globalization of R&D and Developing Countries
Host economies can also derive direct benefits from
TNCs’ R&D units through, for instance, (a) subcontracting and
sponsorship of research to local universities, and (b) licensing
technologies for by-products to local firms. TNCs’ R&D
activities can also affect the employment prospects of trained
people in host economies. Inflows of foreign R&D may help
counteract the risk of brain drain from developing countries by
providing more job opportunities for skilled people, especially
in cases when local capabilities (firms and institutions) cannot
create the amount and type of jobs that would respond to the
needs and expectations of the local trained workforce. They
may also help bring skills back to an economy (e.g. in Ireland or
Taiwan Province of China in the past or, in India today).
In some cases TNCs may contribute indirectly to
upgrading technologies as innovations emerge and consumption
patterns change. The potential spillover effects of TNCs’ R&D
activities could be categorized as follows:
•
•
•
The encouragement of commercial culture among scientists
and engineers. When R&D-related FDI started flowing into
India for instance, scientists in many research institutes
started focusing on patentable research. Many of them have
become entrepreneurs by forming start-up companies.
The implantation of an R&D and innovation culture among
local companies. For example, TNCs’ R&D activities in
India spurred an R&D drive among Indian companies,
whose R&D expenditures and patenting activities have
increased significantly in recent years. Some of these
companies (e.g. software companies) compete directly with
TNCs.
The inflow of manufacturing-related FDI to commercialize
R&D results at the same location if other conducive
parameters are in place.
14
Overview
•
Employee spin-offs of R&D companies.15
Central to the debate on the spillover impact of TNCs’
R&D activities on host economies is the question of whether
knowledge and skills can be isolated from their surrounding
host environment in the long term. For some observers, the
mobility of research personnel and the need for local
procurement of staff, material and services are bound to diffuse
technologies into the local economy.
On the other hand, the benefits from attracting R&D
activities are far from automatic. In fact, in many situations,
they may be limited if the foreign affiliates create too few or no
local linkages to domestic actors. TNCs’ R&D units sometimes
create high-technology enclaves with little diffusion of
knowledge into the economy. Moreover, with the fragmentation
of R&D and the increasing specialization of individual units,
the scope for transferring broad knowledge may be narrowing,
reinforcing the enclave nature of R&D units.
In addition, when investment into the R&D facility
takes the form of a merger and acquisition, it may be argued
that such transactions entail a simple change of ownership, akin
to portfolio investment, with lesser developmental value. Some
take-overs could have an adverse effect on local innovatory
capacities, as was illustrated in the 1990s by the acquisition of
firms in the automotive and telecommunications industries of
Brazil by TNCs. In this case, the result was a scaling down of
R&D activities in the acquired firms (UNCTAD 1999).
FDI into R&D may also divert scarce local R&D
resources of host countries from local firms and research
institutions. For instance, FDI may attract the best R&D
personnel. It may also result in a high opportunity cost when
15
For instance, an engineer working at Hewlett Packard started an
R&D company called Parallax Research in Singapore. This company
now develops products for Hewlett Packard (Reddy 2000).
15
Globalization of R&D and Developing Countries
scarce public resources are diverted to foreign affiliates at the
expense of local firms and institutions. TNCs may also show
more propensity to transfer the results of innovation performed
in developed countries than to transfer the innovation process
itself (UNCTAD 1999). These innovations may not benefit
manufacturing and marketing operations in the host country,
except in that its personnel would be more prestigious and
creative (Pearce 1989).
Finally, the geographical concentration of corporate
R&D in a handful of host countries within the developing world
may raise concerns about the marginalization of the rest of the
developing world in the emerging global knowledge society.
Without an adequate science and technology base, attracting
corporate R&D and benefiting from it could remain a challenge
for the majority of developing countries, rather than an
opportunity. Weighting the opportunity costs of an R&D policy
against the risks of further marginalization and an increased
R&D gap is a matter of debate for policy makers. However, the
changing nature of R&D, and in particular the fragmentation of
R&D activities by TNCs, could open up opportunities to a
number of developing countries. All R&D is not necessarily at
the higher end of the value chain. With the modularization of
R&D by TNCs, some smaller developing countries for instance,
could specialize in niche areas to fit into the global knowledge
networks developing around TNCs.
3.
Policy environment to promote R&D-related FDI and
its benefits
a. Host country measures
The ability to attract and benefit from R&D-related FDI
depends to a large extent on the policy environment in the host
country. A stable and good general policy environment,
including macro-economic and political stability, as well as
consistent and transparent investment, trade and industrial
16
Overview
policies, are important. Good communication systems and other
infrastructural facilities are equally important for the dispersed
R&D activities of TNCs. Developing countries may have to
improve their ICT infrastructure (e.g. access to the Internet).
Furthermore, a well-developed national innovation system
(NIS) – a “network of institutions in the public and private
sectors whose activities and interactions initiate, import, modify
and diffuse new technologies” (Freeman 1987: 1) – can
facilitate the clustering of economic agents in a given host
economy, including foreign affiliates, local firms, and local
research institutions. Hence, specific policies may be required
to improve the availability of local universities, professionals
and researchers (particularly important for global technology
units), to create and nurture local knowledge development and,
improve the attractiveness of the sources of technical excellence
(e.g. universities, suppliers) (de Meyer and Mizushima 1989).
Since TNCs tend to locate R&D in countries where
there are reputed academic institutions, a major challenge for
the national innovation policies of developing countries is to
strengthen their academic establishments by recruiting adequate
staff and providing them with adequate funding to carry out
research. Universities should also be able to provide doctoraland post-doctoral-level education in science and technology
subjects. Such capacity building can take place for instance,
through partnership with the private sector. The participation of
senior managers from both domestic and foreign firms in the
governing boards of the academic institutions can be one way of
strengthening such linkages by making the research more
relevant to the industry (Reddy 2000).
In science-based technologies, the difference between
basic research and applied research is not always clear-cut. At
least some innovation activities in these technologies can be
carried out in academic laboratories. Many governments have
established R&D centres to promote the technological
upgrading of firms. In order to enhance the innovation
17
Globalization of R&D and Developing Countries
capability and economic benefits through university-industry
collaboration, the establishment of science parks may be
important. Such parks may attract both local firms and TNCs to
locate R&D, if the parks are established in proximity to reputed
academic establishments and the staff in these academic
institutions has the freedom to collaborate with enterprises
(Reddy 2000). Some of the parks and business incubators, such
as the Hsinchu Science Park in Taiwan Province of China and
the Magnet Program in Israel, have been quite successful
(World Bank 2004: 173). However, when the dynamic interplay
of entrepreneurship, R&D institutions, skilled labour, capital,
and infrastructure is missing, the results are more mixed (Feser
2002, de Ferranti et al. 2003).
Performance requirements – either mandatory or
voluntary – have been used by policy makers in various
countries to maximize benefits from FDI (UNCTAD 2003).
They have been used in particular to address concerns that
excessive reliance on FDI could limit technological
development, since R&D was perceived to be largely
concentrated in home countries. However, mandatory
applications of R&D requirements appear to be rare. It is more
common to link R&D criteria to the receipt of various kinds of
incentives – these are the so-called voluntary performance
requirements (e.g. in Chile, Malaysia and South Africa, as well
as in several developed countries). However, the results have
often been limited because a firm is unlikely to set up R&D
activities in the absence of local capabilities and technical skills
to absorb, adapt and develop technology and know-how.
Furthermore, performance requirements may carry the potential
risk of losing would-be investors not wishing to comply with
those criteria.
In the area of fiscal incentives, Brazil applies a scheme
in which companies that invest in R&D are levied a reduced tax
on imported products (EIU 2004: 13). India, Malaysia, Mexico,
the Republic of Korea, South Africa and Taiwan Province of
18
Overview
China are other salient cases of developing economies’
providing fiscal incentives to R&D (table 2).16 Some developing
countries have also used financial market interventions to
encourage firms to pursue R&D, including directed credit
schemes (Republic of Korea) and venture capital funds
(Malaysia) (Kim 1997 and Yusuf 2003, respectively). Some
studies have found evidence that R&D incentives were costeffective (Shah and Baffes 1995, for Pakistan; and Shah 1995,
for Canada). However, the literature on tax incentives in the
developed countries17 shows more mixed results in the majority
of the cases analysed. The main reason for these findings is that
in comparison with the availability and quality of appropriately
skilled labour, the provision of fiscal or financial incentives is
of limited relevance for R&D investments.
Table 2. Fiscal incentives for R&D in selected developing
economies, 2004
(Percentage)
Economy
Brazil
India
R&D
depreciation
100
100
Malaysia
200
Mexico
100
Republic of Korea
South Africa
Taiwan Province of
China
100
100
100
R&D capital
depreciation
100
100
Same as other
investment
3 years’ straight-line
depreciation
18–20
25
Same as other
investment
Tax
credit
None
None
None
None
10–25
None
15–20
Source: UNCTAD, based on World Bank (2004: 173).
16
In this respect, they are following the example of some
developed countries, such as the United States, Australia, Canada,
France, Japan and the Netherlands, which offer tax credits, full
expensing of R&D and even double deductions of some R&D
spending (World Bank 2004: 178).
17
See Hall and Van Reenen 1999 for a literature review.
19
Globalization of R&D and Developing Countries
One of the specific policy areas that affect the location
of corporate R&D in developing countries is the protection of
intellectual property rights (IPRs), which is perceived by some
TNCs as a precondition for such locational decisions.
According to corporate surveys, the protection of IPR is usually
mentioned by some TNCs among the top criteria in taking an
R&D investment decision. In a recent survey, 38% of the
respondents mentioned IPR as a critically important challenge,
a higher proportion than for any other issue (EIU 2004: 5).
b. Home country measures
While host country policies are crucial, measures taken
by home countries of TNCs also affect the international
allocation of R&D activities. For example, home countries may
provide special incentives to their TNCs to locate R&D units in
developing countries where such TNCs have assembly or
manufacturing plants. They may also provide special tax
concessions to their TNCs for R&D investments made in
developing countries. The most common home country
measures include support for FDI, training, matching services,
partnerships and alliances, and support for equipment purchase
or licensing (UNCTAD 2004a). For instance, of the 41
programmes and agencies surveyed by UNCTAD in 2004 in 23
countries, 15 provided incentives to their enterprises to enable
them to establish R&D in developing countries. Of these, three
had a technology transfer fund or a financing mechanism that
was independent of FDI support measures (UNCTAD 2004a).
This measure directly facilitates transfer of technology, and
therefore could also be adopted by other countries.
However, the offshoring of R&D activities may also
raise concerns in home countries, in spite of the fact that, in
principle, the offshoring of R&D activities should offer benefits
to all parties concerned. First, a large part of offshoring R&D
activities continues to target developed countries. Slowing
down offshoring could deprive such developed countries of FDI
20
Overview
opportunities. Second, as noted above, important reasons for
firms to expand their R&D activities in lower-cost locations are
to access skills and to lower costs. Protectionist measures to
obstruct the globalization of R&D may therefore have adverse
effects on the competitiveness of the firms involved and, by
extension, their home economies. Given the short history of
R&D globalization, there is a need for further analysis of its
implications for both host and home countries.
c. International dimension
At the international policy level, issues related to FDI in
R&D have been addressed in various manners, depending on
the nature and purpose of individual international investment
agreements (IIAs). The overwhelming majority of those
agreements provide protection to foreign affiliates’ R&D
activities and their related products by defining TNCs’
intellectual property as one type of the investment covered by
the definition provisions of the respective agreement. These
agreements contribute to creating an enabling framework for the
globalization of R&D by TNCs. As regards performance
requirements, some IIAs prohibit using R&D as a condition for
the establishment of an investment, while some others explicitly
mention that the agreements do not prevent a party from
conditioning the receipt of an advantage in connexion with
foreign investment (i.e. an incentive) in compliance with a
requirement to carry out R&D.
The WTO Agreement on Trade-Related Intellectual
Property Rights (TRIPS Agreement) does not expressly address
issues related to FDI in R&D. However, it provides an enabling
framework for the protection of R&D activities (including their
intellectual inputs and outputs) carried out by foreign affiliates,
for instance, by promoting minimum international standards for
the protection of IPRs (e.g. patents, copyrights, trademarks,
industrial designs and trade secrets). These standards are subject
to most-favoured-nation-treatment, national-treatment and
21
Globalization of R&D and Developing Countries
domestic-enforcement obligations. Some aspects of these
obligations and standards however, may limit developing
countries’ policy options for promoting the development of
domestic innovation capacity. For example, the protection of
foreign R&D activities through a patent may limit the
possibilities for domestic industry to engage in follow-on
innovation (e.g. if the patent is broad and covers elements the
domestic third parties would have to rely on for their research).
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